MDU Resources Group, Inc.

Hello, my name is Lori and I'll be your conference facilitator. At this time, I would like to welcome everyone to the MDU Resources Group 2020 second quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key on your telephone keypad. This call will be available for replay beginning at 5 p.m. Eastern Time today through 1159 p.m. Eastern Time on August 19. The conference ID number for the replay is 868-4589. Again, the conference ID number for the replay is 868-4589. The number to dial for the replay is 1-855-859-2056 or 404-537-3406. I would now like to turn the conference over to Jason Vollmer, Vice President, Chief Financial Officer, and Treasurer of MDU Resources Group. Thank you. Mr. Vollmer, you may begin.

Thank you, Lori. And welcome, everyone, to our second quarter 2020 Earnings Release Compass Call. We sincerely hope that you and your families are well during this time. Our conference call is being broadcast live to the public over the internet and slides will accompany our remarks. If you would like to view the slides, you can find them on the events and presentations page under the investors tab of our website at www.mdu.com. Our earnings news release is also available on the website. During the course of this presentation, we will make certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Although the company believes that its expectations and beliefs are based on reasonable assumptions, actual results may differ materially. For discussion of factors that may cause actual results to differ, refer to Item 1A, Risk Factors, in our most recent form, 10-K. Today, I will start by briefly covering this quarter's financial results and then turn the presentation over to Dave Gooden, President and CEO of MD Resources, for an update on our forecast for the remainder of 2020 and looking forward. After Dave's remarks, we will open the line for questions. In addition to Dave and myself, members of our management team who will be available to answer questions today and are dialing in from multiple locations are Dave Barney, President and CEO of Knife River Corporation, Jeff Thiede, President and CEO of MDU Construction Services Group, Nicole Kivisto, President and CEO of our Utility Group, Trevor Hastings, President and CEO of WBI Energy, and Stephanie Barth, Vice President, Chief Accounting Officer and Controller of MDU Resources. Yesterday, we announced second quarter earnings of $99.7 million, or $0.50 per share, compared to second quarter 2019 earnings of $61.8 million, or $0.31 per share. This is an increase of 61% year over year. Our combined utility business reported record second quarter earnings of $11.2 million, a significant increase from earnings of $1.2 million in the second quarter of 2019. The electric utility segment reported earnings of $12.2 million for the quarter, compared to $7.5 million for the same period in 2019. This earnings increase was largely a result of a $4.6 million decrease in operation and maintenance expense, which includes the absence of a prior year planned outage at the Coyote Station, as well as lower payroll-related costs. The company also benefited from higher investment returns on certain benefit plans in the quarter. The absence of a prior year write-down on a non-utility investment also had a positive impact on earnings. Higher residential electric sales Thank you for joining us. and a 4.3% increase in retail sales volumes. This increase in natural gas retail sales was driven by higher residential sales, offset somewhat by lower industrial and commercial volumes. Like the electric side, higher investment returns on certain benefit plans and the absence of the prior year write-down on a non-utility investment were also beneficial in the quarter. Higher depreciation, depletion and amortization expense from increased property plan equipment balances partially offset the decreased loss. The pipeline business had earnings of $9 million in the second quarter compared to $7.1 million in the second quarter of 2019. This business saw increased revenues from its Demick's Lake, Line Section 22 initial phase, and Demick's Lake expansion growth projects, which were placed into service in late 2019 and early 2020, as well as seeing strong customer demand for storage services in the quarter due to seasonal price differentials. Higher investment returns on certain benefit plans also had a positive impact on this segment's earnings. Construction services reported a record second quarter earnings of $27.9 million compared to $22.8 million in 2019. This business also reported record second quarter revenues of $497.2 million up from second quarter 2019 revenues of $464.9 million. Demand for construction services remains high for both inside and outside specialty contracting. Inside specialty contracting was busy with hospitality, data center, and commercial work, and the outside contracting workloads increased from high demand in the utility industry. Increased workloads are partially offset by higher selling general administrative costs, primarily payroll related as this business operated at record employment levels for the second quarter. Our construction materials business also reported record results for the second quarter with $53 million in earnings, up 82% from the prior year's $29.2 million. Revenues were also a record for the second quarter at $621.1 million compared to $596 million for the same period in 2019. Increased earnings was driven by higher contracting and materials margins and revenues. Favorable weather across this business's footprint allowed for higher product sales and the ability to work through more backlog than typical for the second quarter, which drove the increase in margins. Earnings in this segment also benefited from higher investment returns on certain benefit plans. While these higher investment returns on benefit plans positively affect earnings for all segments, the combined impact is only $6.2 million, or 16% of the $37.9 million increase in earnings from quarter to quarter. All business lines successfully contained operating costs and continued providing essential services to our customers during this unprecedented time, and we were also able to deliver exceptional year-over-year earnings growth. That summarizes the financial highlights from the quarter, and now I'd like to turn the call over to Dave for his formal remarks. Dave?

Well, thank you, Jason, and thank you to everyone listening for spending your time with us today and for your continued interest in MDU Resources. We hope that everyone there is safe and healthy. I want to start out by saying thank you to our more than 15,000 employees for making this a very successful quarter. Our financial results, which were released yesterday, show the continued strength of our two-platform business model and underscores our ability to continue providing essential services across our business lines during this challenging economic time. Given the strong performance that we saw in the quarter, with record revenues at both construction companies, and the excellent results from our regulated energy delivery companies, we are raising our earnings per share guidance for 2020 to now a range of $1.65 to $1.85 per share. Looking at our forecast for the remainder of 2020 and our performance in the second quarter, we're also raising revenue guidance for both construction services and construction materials and as well as reinstating margin guidance. We now expect construction services to end the year with revenues in a range from $1.9 billion to $2.1 billion with margins comparable to 2019 levels. And construction materials revenues now in a range of $2.2 billion to $2.4 billion with margins actually slightly higher than what we saw in 2019. Turning to the regulated energy delivery platform, our utility business filed several regulatory cases to record costs incurred associated with providing safe and reliable electric and natural gas service to our now 1.13 million customers. We continue to see strong customer growth across our service territory. In fact, on a year-over-year basis, customer growth has been slightly higher than 2%. During this quarter, the utility received approval from the Montana Public Service Commission to defer accounting costs related to the closure of our Lewis and Clark and Heskett electric generating facilities. We announced the closure of these two facilities at the beginning of 2019, along with our intent to build an 88 megawatt natural gas fired electric generating facility. And just this morning, the North Dakota Public Service Commission approved an all-party settlement on our applications relating to the deferred accounting order relating to the costs associated with retiring the current facilities, along with the advanced determination of prudence filing related to the 88-megawatt Pescat 4 station. In response to the coronavirus pandemic, the utility filed with public service commissions in all eight states a request to defer accounting orders for costs related to the crisis and has received approval from Idaho, Minnesota, and Wyoming to date. Natural gas general cases were also filed in the states of Montana and Washington during the quarter, requesting increases of 13.4% and 5.3%, respectively. At our pipeline business, we also had a great second quarter, showing the success of our organic growth projects. This business also benefited from increased volumes of natural gas being transported to our storage facilities as customers took advantage of seasonal commodity price differentials. The company continues to work on the planning and the regulatory filings required for the North Bakken expansion project in western North Dakota. and we expect construction to begin on this project early in 2021. In July, this business filed with the Federal Energy Regulatory Commission an amendment to its application for this project. Revised forecasts for Bakken natural gas production show slower growth, so we have decided to decrease the initial design capacity to this project to now 250 million cubic feet per day simply by reducing compression. which in turn reduces the anticipated capital expenditures for the project. The size of the pipe used for this project will remain the same, allowing us to scale up capacity by increasing compression as Bakken production rebounds. We expect this project to be in service in late 2021. Now I'd like to move on to construction. Our construction services group had simply an outstanding second quarter. as demand for both inside and outside specialty contracting remained strong. CSG reported record revenues, record earnings, and record backlog, all while working under modified conditions to protect the health and safety of our employees and customers during the pandemic. While this business did see slowdowns on a handful of projects as it relates to COVID-19, The strong demand that we have for its services has kept our crews working and we've only added to our backlog. CSG ended the quarter with a record $1.31 billion in backlog, showing the strength of the bidding opportunities across this business's footprint. As a reminder, we are increasing revenue guidance at this business to now a range of $1.9 to $2.1 billion with margins comparable to 2019 levels. And finally, our largest contributor to earnings for the quarter is our construction materials business. This business, like construction services, reported record revenues and earnings in the second quarter. Favorable weather across this business's markets allowed the company to begin work on projects earlier, thus working through more backlog than typically completed in the second quarter. The good weather paired with recent acquisitions drove more product sales and in turn resulted in higher margins. Construction materials backlog at June 30th stood at $875 million and is the second highest on record, falling short only of last year's record second quarter backlog of $1.04 billion. We have seen a decline in the number of new projects awarded in the quarter, which we believe stems from economic uncertainty as a result of COVID-19. While bidding out new projects has been challenging under pandemic-related working conditions, we are excited about the opportunities in front of this business and the strong bidding opportunities we see going later into this construction season. So to bring all of this together, we had a very strong performance across all business lines here in the second quarter. While we continue to navigate through the changing and challenging times as it relates to COVID-19 and its response, we have been able to continue to provide the essential services to support the infrastructure that our nation needs. Our workforce has also grown over the last quarter. and as of June 30th, we are actually at record employment levels for the corporation with 15,247 employees, nearly 1,000 employees higher than at this same time last year. It is this type of growth in our companies that allows us to continue building a strong America. As always, NV Resources is committed to operating with integrity along with a focus on safety while creating superior shareholder value. as we continue providing essential services to our customers. I certainly appreciate your interest in and commitment to MDU resources and ask now that we open the line to questions. Operator?